My problem with WeWork

By
mjkagan
| Last updated 07/14/2016

Have been doing some thinking about WeWork’s business model and I’m not impressed.

In case you haven’t run into WeWork, it’s kind of the prototypical co-working company. They develop and manage nice, shared office spaces that individuals and small companies can rent on a week-to-week basis.

The reason WeWork exists is that there is a mismatch between supply and demand for smaller spaces / tenants. Most landlords want to rent space on long-term leases to established companies. Most smaller tenants are not well-established and don’t want to commit to a long lease.

So, WeWork steps in, signs a long-term lease with the landlord and then subleases the space to tenants. Because smaller spaces usually rent at a higher price per square foot and because WeWork is willing to accept a short time commitment, it can extract rents from its subtenants which are far in excess of what it needs to pay the landlord.

That delta, between what WeWork pays the landlord and what the subtenants pay WeWork, is the margin on which WeWork lives.

Because that delta has been pretty large, WeWork has been able to attract large amounts of capital to build out huge amounts of co-working space all over the country pretty quickly.

But what, really, is the barrier to entry? WeWork spends a lot of money to wrap services, coffee / food, networking, classes, etc. around the space in order to differentiate its offering. I’m not sure whether that’s what the tenants care about.; I think it’s mainly about the flexibility.

So, any landlord with suitable space sitting empty can just bite the bullet, spend the money, hire two people as staff, and set up as a co-working space. Over time, as more landlords do this, the premium WeWork can charge goes down, compressing its margins.

And as those margins compress, WeWork will find it harder to sustain the kinds of programming its trying to use to differentiate itself, dynamiting its barrier to entry.

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Moses Kagan

Hi there. My name is Moses Kagan. Through my company Adaptive Realty you can gain access to local area knowledge and deals in real estate. If you're looking to buy, renovate, manage or sell apartment buildings in Southern California, you're in the right place.